As demonstrated vividly during the COVID-19 crisis, restaurants, bars, and even retail tenants (which we’ll refer to collectively as “restaurants”) can make a lot of money by taking their business outdoors, especially but not exclusively in the spring and summer. All of this has made patios, porches, and other adjacent outdoor dining spaces a hot commodity. 

Standard restaurant leases, however, cover only the space inside the shopping center, building, or facility. Result: Tenants that are currently confined to the indoors must either relocate or get the landlord’s permission to use the outdoor dining space. Accommodating these arrangements can increase a property’s profitability and ability to attract and retain tenants. But it can also backfire if you don’t include the right legal protections. 

Here’s a briefing on the 18 protections to include when agreeing to allow restaurant tenants to use outdoor dining space, along with a Model Lease Clause that you and your attorney can adapt.

Phase 1: Legal Structure 

The first set of protections involve the legal nature of the tenant’s use right. 

1. Give tenant a revocable license. A legal agreement giving tenants the right to operate in adjacent outside space can be structured as either a leasehold interest in which the outdoor dining space becomes part of the leased premises or as a revocable license that’s separate from the lease. The latter option may be more favorable to landlords because it enables them to take back the permission and recapture the space quickly and at any time. This protects you in case the outdoor restaurant ends up creating security, sanitation, noise, or other problems that you didn’t expect. A revocable license also empowers you to put the outdoor operation on temporary pause, for example, if you need access to the space to make improvements or renovations to the property [Clause, par. a]. 

Strategic Pointer: Tenants may be hesitant to give the landlord discretion to pull the plug on their outdoor restaurant at a moment’s notice. Your ability to sell the revocable license idea will ultimately depend not just on bargaining leverage but also the tenant’s business model and designs for the space. Thus, a revocable license may work for a small café that just wants to be able to set up some outside tables and chairs to serve customers in the summer but not for a tenant that envisions a permanent, year-round operation with fixed booths, glass enclosures and other major installations.    

2. Make use right personal to tenant. Another advantage of structuring the use right as a license rather than a lease interest is that you can make it personal to the particular tenant and bar it from transferring or assigning the right to a third party [Clause, par. l].

3. Get right to unilaterally revoke & modify license. Have the tenant agree and acknowledge that you have a right to modify or revoke the license at your “sole and absolute discretion” at any time and for any reason. Your only obligation is to furnish the tenant prior written notice [Clause, par. o(i)]. 

Phase 2: The Consent Process

The following protections establish a consent process to prevent tenants from turning their general right to use outdoor dining space into a blank check for any arrangement they want.

4. Get right to approve proposed use. Establish your right to review and veto an arrangement you don’t like by requiring the tenant to get your prior written consent for any proposed use [Clause, par. b].

5. List conditions for granting consent. Promise not to withhold consent unreasonably while also listing the conditions required for consent, including:  

• The tenant must submit drawings, plans, and other documents you deem necessary to understand the proposed design and configuration of the space for your review before any construction begins [Clause, par. b(i)];
• The proposed configuration and use must fully comply with all applicable legal requirements [Clause, par. b(ii)];
• The tenant must obtain all permits, consents, and government approvals required to operate the space in the proposed configuration—while tenant should pay the costs of securing the necessary approvals, agree to cooperate in the process, provided that the tenant isn’t currently in default under the lease [Clause, par. b(iii) and (iv)]; and 
• The tenant must install any fences or barriers that may be required by government officials or by you in your reasonable discretion [Clause, par. b(v)].

Phase 3: Restrictions on Tenant’s Use

Next, you need to address how the tenant may use the outdoor dining space it licenses. 

6. Extend lease terms to outdoor dining space. Start by making it clear that even though the outdoor dining space isn’t part of the leased premises, all relevant lease terms, requirements, and conditions apply. That includes the tenant’s right to use the space only for the permissible use and subject to the same restrictions specified in the lease. Thus, for example, a tenant that leases inside space for a restaurant shouldn’t be allowed to use outdoor space to sell smoking and vaping products, especially if another tenant has an exclusive to sell those products [Clause, par. c]. 

7. Set operating hours ground rules. Specify that the tenant can open for business in the outdoor dining space only during the hours that the center or building is open for business. Letting the tenant operate outside before or after regular business hours may generate security, traffic, noise, and other problems for other tenants, not to mention other businesses and people in the neighborhood. Also indicate if the tenant will use the outdoor dining space only on a seasonal basis [Clause, par. d]. 

8. Set furniture ground rules. Let the tenant install furniture, equipment, lighting, and signage (“furniture”) in the outdoor dining space, provided that:

• It does so at its sole expense [Clause, par. e];
• It installs only high-quality furniture whose appearance is consistent with a first-class restaurant and the center or building’s design and construction [Clause, par. e(i)];
• You provide prior written approval to the furniture’s design, size, color, location, and mode of installation [Clause, par. e(ii)]; 
• It removes and stores the furniture, at its sole expense, during extended periods, e.g., one month or more, in which it doesn’t use the space [Clause, par. e(iii)];
• It accepts sole responsibility for any furniture damage, destruction, theft, vandalism, or loss [Clause, par. e(iv)]; and
• It immediately removes its furniture and restores the outdoor dining space to its previous condition after receiving notification of modification or revocation of the license [Clause, par. o(ii)].

9. Ban specific uses. To fortify the tenant’s general duty to comply with applicable lease terms, specify things that it can’t do within or adjacent to the outdoor dining space, including: 

• Blocking, impeding, or obstructing access to the center or building or pedestrian traffic through the common areas adjacent to the space [Clause, par. f(i)];
• Erecting or installing any canopy, covering, or enclosure without your prior written approval [Clause, par. f(ii)]; 
• Creating loud music, excessive noise, noxious odors, smoke, or any other nuisance that may interfere with another tenant’s use and enjoyment and/or endanger the health and safety of any person [Clause, par. f(iii)]; and
• Allowing non-customers to loiter [Clause, par. f(iv)].

10. Require tenant to keep space clean and in good repair. Make the tenant solely responsible for keeping the outdoor dining space clean and in good repair. Specify that trash must be removed from the space at least once a day or more frequently when necessary. Establish your right to step in and perform self-help repairs, cleaning, and trash removal if the tenant fails to do so. To give tenants added incentive, require them to reimburse you for the costs of these self-help operations at a premium rate, e.g., 120% [Clause, par. g].

11. Require tenant to maintain security in space. Follow the same approach for security by making the tenant responsible for maintaining security within the outdoor dining space. Carve out the right to deploy your own security personnel and measures if the tenant doesn’t meet this obligation and the tenant’s duty to reimburse you for the costs of these self-help measures as additional rent [Clause, par. i]. 

12. Require tenant to pay for necessary common area repairs. Make the tenant reimburse any costs you incur in making repairs to common areas to fix damages resulting from the tenant’s use of the outdoor dining space, such as where the tenant starts a fire in the space that spreads to hallways or parking areas. Such recourse is advisable even if insurance covers the damage since it may enable you to avoid the headache of filing a claim and risk of premiums increases [Clause, par. h]. 

Phase 4: Compensation Tenant Must Pay for Use of Space

Let’s segue from use restrictions to money questions.

13. Require tenant to pay additional rent on space. Start with rent. The question: How much, if any, will you charge the tenant for use of the outdoor dining space? You also need to determine whether to structure these monetary obligations as an addition to base rent or a separate rent. If the lease is a percentage rent agreement, increasing the base rent will also increase the tenant’s breakpoint. To keep things simple, our clause structures the charge as a separate monthly rent for the space labeled as the “Outdoor Dining Space Rent” [Clause, par. j(i)]. 

14. Require tenant to pay percentage rent on sales in the space. Require tenants with percentage rent leases to pay percentage rent on sales generated in the outdoor dining space, even if you don’t charge them rent for the space. Just make sure the lease spells out this obligation so that tenants can’t later argue that outdoor dining space sales aren’t gross sales subject to percentage rent because they didn’t occur in the leased premises [Clause, par. k].

15. Require tenant to pay other additional costs attributable to space. List all of the other additional costs attributable to its use of the outdoor dining space for which tenant is responsible, including: 

• Taxes payable relating to the outdoor dining space as allocated in accordance with the formula for attributing or allocating the tenant’s share of taxes under the lease [Clause, par. j(ii));
• All utility charges payable with respect to its use of the space, which may be significant if the space is large and designed to be used in all seasons [Clause, par. j(iii));
• All out-of-pocket costs that the landlord incurs for extra security and cleaning [Clause, par. j(iv)); and
• All other costs attributable to its use of the space [Clause, par. j(v)].

Strategic Pointer: Since the outdoor dining space doesn’t form part of the lease premises, these additional maintenance, cleaning, and security costs don’t increase its pro rata share of CAM expenses. That’s a deliberate strategy designed to eliminate the need to adjust the CAM allocations of all of the other tenants in the center or building since if the restaurant’s CAM share increases, all of the other tenants’ share will decrease accordingly. 

Phase 4: Additional Legal Protections

Here are some other basic protections to include in your lease clause granting tenants a right to use outdoor dining space.

16. Limit your liability for tenant’s not being able to use space. Tenants may be unable to use the outdoor dining space due to natural disasters, denial of government approvals, or other reasons beyond your control. Make it clear that you’re not liable to the tenant unless it can’t use the space as a result of something you did wrong [Clause, par. m]. 

17. Require tenant to indemnify you. A lease clause requiring the tenant to indemnify—that is, reimburse, defend, and hold you harmless—from claims, losses, and damages arising from its use of the leased premises may not apply to the licensed outdoor dining space. So, include language requiring indemnification related to the tenant’s use and occupancy of that space [Clause, par. n].  

18. State that tenant’s reimbursement obligations survive license revocation. Say that the provisions requiring the tenant to reimburse you for cleaning, repair, restoration, security, and other costs related to its use of the outdoor dining space survive the revocation of the license. Otherwise, the tenant may argue that it doesn’t have to reimburse you for expenses incurred after revocation [Clause, par. q].